CMA Study Group

Part 1: Joint Product Costing

  • 1.  Part 1: Joint Product Costing

    Posted 26 days ago
    Hi all,

    Can someone please explain to me the following example?

    Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode's overall gross margin?


    Many thanks in advance!

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    Odno Galdan
    United States
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  • 2.  RE: Part 1: Joint Product Costing

    Posted 25 days ago
    Hello Odno,

    Gross margin will increase by $ 1
    Consider the followings: Sales = $20 , COGS = $10 , Sell & Admin exp. = $ 2
    By-Product method:             Gross profit = $20 - ($10 - $3) = $13     and  Net profit = $13 - $2 = $11
    Joint product method:          Gross profit = ($20 + $4) - $10 = $14   and  Net profit = $14 - $2 - $1 = $11

    As described, the joint product method will treat May's as normal production item by adding its sales to revenue and deducting its costs as direct & indirect
    in our case here the only cost for May is $1 selling exp. (Indirect) which should be deducted after Gross Profit line item.

    Kind regards

    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
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  • 3.  RE: Part 1: Joint Product Costing

    Posted 23 days ago
    Hello Samer,

    Thank you so much for the detailed explanation and its very helpful. I appreciate that. From your example, just a quick question that when we use the joint product method, is the main product not treated as COGS?

    Thanks again!

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    Odno Galdan
    United States
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  • 4.  RE: Part 1: Joint Product Costing

    Posted 25 days ago
    The total gross margin would be the same.

    Revenue less cost of sales =Gross margin

    There would be no effect in total gross margin as long as the total revenue and total cost are the same. It is only a matter of presentation and allocation  of joint  cost.





  • 5.  RE: Part 1: Joint Product Costing

    Posted 25 days ago
    Hello Marlon,

    Your answer is wrong answer

    How total cost is the same and it is only a matter of presentation ??? You have to define what direct / variable cost is and what is total.
    The question itself has the answer because the accounting for Joint product is different from By-product (case of immaterial value of by-product)
    What matters here is the by-product's selling cost ($1) which should be considered as indirect, case of accounting for May as normal joint product at split off point.


    ------------------------------
    Samer Ahmad, FMVA, SCA
    Kuwait
    ------------------------------



  • 6.  RE: Part 1: Joint Product Costing

    Posted 25 days ago
    Ok,thanks